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Lending Relationships and the Collateral Channel

Author

Listed:
  • Gareth Anderson
  • Saleem Bahaj
  • Matthieu Chavaz
  • Angus Foulis
  • Gabor Pinter

Abstract

This article shows that lending relationships insulate corporate investment from fluctuations in collateral values. The sensitivity of corporate investment to changes in real-estate collateral values is halved when the length of relationship between a bank and a firm, or its board of directors, doubles. Long relationships with board members dominate relationships with the firm in dampening the collateral channel. Moreover, lending relationships with directors in their personal capacity insulate corporate investment over and above corporate relationships. Our findings support theories where collateral and private information are substitutes in mitigating credit frictions over the cycle and show that lending relationships are more multi-faceted than previously thought.

Suggested Citation

  • Gareth Anderson & Saleem Bahaj & Matthieu Chavaz & Angus Foulis & Gabor Pinter, 2023. "Lending Relationships and the Collateral Channel," Review of Finance, European Finance Association, vol. 27(3), pages 851-887.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:3:p:851-887.
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    Cited by:

    1. Saleem Bahaj & Angus Foulis & Gabor Pinter, 2020. "Home Values and Firm Behavior," American Economic Review, American Economic Association, vol. 110(7), pages 2225-2270, July.
    2. Saleem Bahaj & Angus Foulis & Gabor Pinter & Paolo Surico, 2018. "Employment and the Collateral Channel of Monetary Policy," Discussion Papers 1832, Centre for Macroeconomics (CFM).
    3. Biswas, Sonny, 2023. "Collateral and bank screening as complements: A spillover effect," Journal of Economic Theory, Elsevier, vol. 212(C).
    4. Panagiota Papadimitri & Fotios Pasiouras & Menelaos Tasiou, 2021. "Do National Differences in Social Capital and Corporate Ethical Behaviour Perceptions Influence the Use of Collateral? Cross-Country Evidence," Journal of Business Ethics, Springer, vol. 172(4), pages 765-784, September.

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    More about this item

    Keywords

    Collateral; Lending relationships; SMEs; Information frictions;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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